CRISIL has assigned a CRISIL IPO Grade "2/5" (pronounced "two on five") to the proposed initial public offer of VRL Logistics Ltd. (VRL). This grade indicates that the fundamentals of the issue are below average relative to other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The offer price for the issue may be higher or lower than the level justified by its fundamentals. The grade is not a recommendation to buy / sell or hold the graded instrument, the graded instrument's future market price or its suitability for a particular investor.

The grading reflects VRL's large scale of operations in terms of fleet size, route network and transshipment terminals for its hub and spoke model. With a fleet size of more than 2,500 vehicles and over 2,100 offices, VRL has a well-established network across the country. The company's top-line would benefit from ongoing investments in the country's road network, which will lead to improved connectivity and faster delivery times for road transporters. Also, healthy demand for freight movement is expected to support the revenue growth of VRL. The company has strong in-house vehicle maintenance and tracking capabilities, which helps reduce costs and improve utilisation of vehicles.

The grading factors in the intensifying competition from several large and small players in the transportation business, which exerts pressure on margins. The high debt levels are likely to adversely impact net profit margins. Also, in the past, the company ventured into businesses which led to tight cash flow situations, leading to delayed payments. Further, the corporate governance structure of the company is inadequate.

Mr. Vijay Sankeshwar, who is VRL's chairman and managing director, has over 30 years of experience in the transport business. VRL also has a strong and experienced management team.

The company aims to raise approximately Rs. 2 billion through the fresh issuance of 27 million shares.

About the company and the issue
VRL is primarily engaged in the goods transportation and logistics services business; the company also operates a fleet of buses for passenger transport. The company recently ventured into the wind power generation and air charter businesses. VRL, which commenced operations as a proprietary concern in 1976, has a well-established network across the country, comprising 799 owned branches and 1,387 exclusive franchisee offices, and a fleet of 2,486 trucks and 197 buses. In addition, it also has 43 transshipment hubs, which facilitate the hub and spoke business model. The company's promoter is Mr. Vijay Sankeshwar.

In September 2006, the company entered the wind energy business by setting up a wind farm at Kappatgudda in the Gadag district of North Karnataka. It has commissioned 34 wind turbine generators, having a power generation capacity of 42.5 MW, with the assistance of Suzlon Energy Ltd.

In 2006-07, the company reported a net profit of Rs 852.0 million on a turnover of Rs 4,416.2 million. The return on capital employed (RoCE) and return on equity (RoE) was 39.2 per cent and 141.6 per cent, respectively. Included in VRL's 2006-07 net profit is a one-time gain of Rs 1,165 million on account of the stake sale of its media subsidiary.

About CRISIL IPO Grading
CRISIL IPO (Initial Public Offering) Grading is an opinion on the fundamentals of the graded issue that reflects CRISIL's independence and expertise. This opinion is expressed as a relative assessment in relation to other listed equity securities in India. The assessment is based on a grading exercise carried out by industry specialists from CRISIL Research. A CRISIL IPO Grade 5/5 indicates strong fundamentals and a CRISIL IPO Grade 1/5 indicates poor fundamentals. CRISIL IPO Grading reflects its assessment of the graded company's equity fundamentals as distinct from an assessment of debt fundamentals. A CRISIL IPO Grade should not be construed to mean a comment on the price of the graded security nor is it a recommendation to invest or not to invest in the graded security.

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